"How much can I afford?" is the first question nearly every home buyer asks. Lenders will give you one number, financial advisors may give you another, and your gut probably has its own opinion.

Below is a way to work out what you can actually afford, which is often less than what you can technically qualify for.

The Short Answer

Two common rules of thumb:

Conservative rule: 2.5-3× your annual income
Stretch rule: 4-5× your annual income

If you earn $100,000/year, that works out to:

Conservative: $250,000-$300,000 home
Stretch: $400,000-$500,000 home

Treat these as starting points. The real answer depends on your debt, down payment, local taxes, and lifestyle priorities.

What Lenders Look At

Lenders rely on two main ratios to decide how much they'll lend.

Front-End Ratio (Housing Ratio)

Housing costs ÷ Gross monthly income ≤ 28%

Housing costs include:

Principal and interest
Property taxes
Homeowner's insurance
HOA fees
PMI (if applicable)

Example:

Gross income: $8,000/month
Maximum housing payment: $8,000 × 28% = $2,240/month

Back-End Ratio (Debt-to-Income, or DTI)

All monthly debt ÷ Gross monthly income ≤ 36-43%

All debt includes:

Housing costs (above)
Car payments
Student loans
Credit card minimums
Other loan payments

Example:

Gross income: $8,000/month
Current debt payments: $500/month
Maximum total debt: $8,000 × 43% = $3,440
Maximum housing: $3,440 - $500 = $2,940/month

Maximum Loan Based on Payment

Once you know your maximum payment, work backward to the loan amount. At 7% interest on a 30-year term:

$2,000/month payment → ~$300,000 loan
$2,500/month payment → ~$375,000 loan
$3,000/month payment → ~$450,000 loan

Add your down payment to get your maximum home price.

Income-Based Home Price Guidelines

Annual Income	Conservative (3×)	Moderate (4×)	Stretch (5×)
$60,000	$180,000	$240,000	$300,000
$80,000	$240,000	$320,000	$400,000
$100,000	$300,000	$400,000	$500,000
$120,000	$360,000	$480,000	$600,000
$150,000	$450,000	$600,000	$750,000
$200,000	$600,000	$800,000	$1,000,000

These figures assume:

20% down payment
Good credit (740+)
Minimal other debt
Average property taxes/insurance

What Lenders Approve vs. What You Can Afford

Lenders often approve more than you should spend. A lender might approve you for $500,000 because you technically meet their ratios, but that doesn't mean you should buy a $500,000 house.

Why lender maximums are risky:

They use gross income, while you live on net
They don't account for retirement savings
They ignore variable expenses (kids, medical, etc.)
They assume you want to put the maximum toward housing
They don't consider job security

A more realistic approach is to spend 25-28% of your net (take-home) income on housing, rather than 28-43% of gross.

Factors That Affect Affordability

Interest Rates

Each 1% rise in rates reduces your buying power by roughly 10%:

Rate	Monthly Payment on $400K	Effective Buying Power
5%	$2,147	$400,000
6%	$2,398	~$358,000
7%	$2,661	~$322,000
8%	$2,935	~$292,000

At 8% instead of 5%, the same payment buys about 27% less house.

Property Taxes

Property taxes vary a great deal by location:

State	Effective Rate	Annual Tax on $400K
Hawaii	0.29%	$1,160
Colorado	0.51%	$2,040
California	0.74%	$2,960
Texas	1.80%	$7,200
New Jersey	2.49%	$9,960

A $400,000 home in New Jersey costs $8,800/year more in taxes than one at the same price in Hawaii, a difference of $733/month.

Hidden Costs of Homeownership

Your mortgage payment isn't your total cost. Also budget for the following.

One-time costs:

Closing costs: 2-5% of price
Moving expenses
Initial repairs/updates
Furniture and appliances

Ongoing costs:

Maintenance: 1-2% of home value annually
Utilities (often higher than renting)
HOA fees
Lawn care/snow removal
Higher insurance than a renters policy

Example for a $400,000 home:

Mortgage payment: $2,661
Property taxes: $500
Insurance: $150
PMI: $150
Maintenance reserve: $400
Utilities increase: $150
True monthly cost: $4,011

That's 50% more than the mortgage alone.

Affordability Rules of Thumb

Conservative guideline: 2.5-3× annual income
Lender maximums (28/43% ratios) are often more than you should spend
Use net income, not gross, for realistic budgeting
Interest rates have a large effect on buying power
Property taxes and insurance vary widely by location
True housing cost is 30-50% more than the mortgage payment
Your life stage and goals should shape how much house you buy

Affordability is partly arithmetic and partly a lifestyle choice. Being "house poor," with a beautiful home and no money for anything else, isn't a win. Buy what you can comfortably afford and leave room for the rest of your life.

Run the numbers yourself

Put this guide into practice with the mortgage amortization calculator. It is free and needs no account.

Open the mortgage amortization calculator

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